16 February 1998 00:00 [Source: ICB]Consolidation in the European chemical industry is being mirrored by chemical distributors, which expect to take a larger slice of the growing distribution pie over the next few years. Marjorie Walker reports on trends in an industry which is increasingly moving towards globalisation.
When Duisberg-based Klöckner, one of Germany and Europe's leading distributors, was put up for sale by its parent Viag in 1997, several of its competitors in the distribution business rushed to look over the firm. But it was the German trading company Metallgesellschaft (MG) that secured the prize, announcing the acquisition of the DM700m ($382.93m) turnover distributor in December. European Union approval was granted in January this year and MG was rocketed into the major league of European chemical distributors.
Metallgesellschaft's head of chemicals, David Wacznadze, explains that MG, already a significant presence in chemical trading, had taken a decision to expand its presence in distribution. The company felt it had to move quickly and decisively while it still had a chance to break into the rapidly consolidating market. Industry sources suggest that Klöckner became available because of restructuring at Viag, but also because management had somehow failed to deliver on its earlier vision of a pan-European distribution network.
The rapid consolidation in the distribution industry which took place in the 1990s is set to continue into the next century.
###6108###Wacznadze feels that buying Klöckner was an opportunity that MG could not miss. Other players, like Brenntag, Pakhoed and Ellis & Everard, had grown over the decade, strengthening and expanding their position in Europe and the US. This offered MG an opportunity to catch up.
Only a few years ago chemical distribution accounted for 8% of Europe's chemical sales. The proportion is now 10-12% and distributors forecast that if the trend continues it will reach 15-16% within two to three years. This is well below the 20-25% in the US, a figure which is probably not a realistic goal for Europe, although the breakdown of national boundaries and opening up of new markets in eastern and central Europe might extend the opportunities.
The major chemical producers have been involved in a frenetic round of restructuring to combat the perceived threat to their home and export markets from new capacity in Asia and the Middle East. The need to focus on what they do best has never been so acute. They are accepting that the specialists in the logistics, storage and distribution industries have expertise and facilities that militate against continuing these functions in-house.
###6109###So the pie available to distributors is growing. At the same time, the largest players - those with access to capital - are in the best position to increase their slice. It is becoming more and more difficult for some of the smaller players to remain in the business, as both in the chemical and distribution industry, national borders are disappearing. Suppliers are consolidating and increasingly looking for distributors that can represent them in several markets.
Whereas in the early 1990s national agreements between distributors and suppliers were the norm, as we approach the end of this decade pan-European contracts are becoming increasingly common and for some major suppliers and distributors contracts spanning North America and Europe are common. The same is true for distributor/customer contracts. The smaller distributors are also under pressure from the need to invest to improve environmental standards. The adoption of Responsible Care at the supplier has been mirrored by the Responsible Distribution initiative. Rients Visser, chairman of Brenntag, Europe's largest distributor, points out that many of the family-run distribution companies in Europe have founders approaching retirement. In many cases their family has not become involved in the business so it is not surprising that they are unwilling to invest and want to sell out. However, he warns that buying a family-based business is not just a question of money. Relationships are involved; there is a need to reassure the seller that the business he has built up will continue to flourish. This view appears to be borne out by Peter Woods, chief executive officer of Ellis & Everard.
Buying chemical distribution sites in Europe has always been a hazardous business, even though as Woods points out, the leading distributors have acquired greater under- standing of the risks. In addition, technical skills in site remediation are getting better.
###6110###In the US, legislation that requires ground remediation only to brownfield standard has improved the viability of distribution transactions. However, Ellis & Everard's concentration of acquisition activity in Europe on polymer distribution and on certain speciality areas and the reluctance to take on liquid distribution sites is no accident. It stems from the very real concern over assuming liability for a heavily contaminated site.
Small players often cannot afford to bring their sites up to scratch, but nor can they afford to close them. They have no choice but to continue to operate because the issue of site contamination really only surfaces if the site changes hands or if an incident attracts attention. Any move towards site audits in Europe would inevitably hasten the process of consolidation in the business so its not surprising that many distributors have resisted the process. It seems inevitable that irresponsible players could be forced out of business, even bankrupted if a site audit reveals a large liability.
So far Europe has no site audit system but the major distributors are keen that audits are accepted as an integral part of acceptance into the reformed trade body, the FECC (Federation Européenne du Commerce Chimique).
The industry body will set standards and, says Visser: 'You cannot be a member if you do not comply. Site audits are a must, but as in shipping they must be carried out by a responsible third party. If every supplier wants to audit my site, no work will be done.' Metallgesellschaft's move into distribution is backed by its existing presence in trading and its interest in the French distributor Safic Alcan. In terms of chemical trading its main products are sulphur and sulphuric acid. There it has a pan-European and international business. In fertilisers it is involved in selling eastern Euro- pean material in western Europe, the Mediterranean and further afield. It is also involved in industrial products, petrochemicals and inorganics.
MG acquired its majority stake in Safic Alcan in 1992. Currently the stake is around 80%, but this will be reduced to 70% to increase liquidity in the shares and to raise funds for future expansion.
Safic Alcan's turnover is around FF5bn ($817m) with major interests in the distribution of tropical products, palm oil, rubber and latex on a global basis. The speciality chemicals business, now accounting for 20% of Safic Alcan's turnover, sprang up mainly to supply rubber processing chemicals to its customer base. This business is particularly strong in France, Spain, Italy and Portugal and also has a strong presence in the US and Malaysia.
Klöckner's chemical distribution business is strong in Germany, France and the Netherlands and includes some interesting speciality businesses in Germany. Buying Klöckner adds tank storage and liquid chemical distribution to the MG portfolio, strength in eastern and central Europe and obviously increases the more stable distribution portion of its business portfolio. This will soon include another major acquisition, the trader Chemag.
MG is in discussions with BASF over the sale of this business, which is particularly strong in petrochemical trading. Although the links with BASF have been diminishing over the years, the Chemag trading portfolio covers many of the products in BASF's portfolio and should therefore continue to benefit from its links with its former parent. Chemag is strong in Russia where it trades pharmaceutical raw materials, in South Africa and Spain and in India and China where it is active in petrochemicals and specialities like organic intermediates.
The distinction between trading and distribution is sometimes blurred, but Wacznadze is clear that MG's future will lie in adding value to the business. This will involve looking carefully at other acquisitions which will widen geographical cover, increasing its involvement in specialities and growing its compounding and packaging businesses.
Even in trading it will increasingly be involved in structured, ongoing trading activity rather than one-off spot market deals. Wacznadze also says the group will strengthen its activities in the methanol market and intensify its cooperation with Lurgi Oil and Gas, including buy-back agreements.
The combined sales of the four businesses, Frankfurt Handel, Safic Alcan, Klöckner and Chemag, which will make up MG's trading and distribution arm, is estimated at around DM3.2bn, but the chemical distribution business is considerably smaller than this. Palm oil alone accounts for DM1.5bn.
Distributors all point to the restructuring and consolidation in the global chemical industry as opening up all sorts of opportunities for businesses. All the cosy relationships that survived into the 1990s are disintegrating and the momentum for change and growth is building rather than slowing.
For Ellis & Everard, the impact of ICI's metamorphosis from a bulk chemical to a speciality chemical producer has been relatively positive, says Woods. The group has maintained strong links with the businesses sold and business is flourishing as the ex-ICI businesses have new enthusiastic owners, dedicated to their product areas. Links with the purchased ex-Unilever businesses were already good and growing. Woods comments that the ICI situation is just one manifestation of the period of rapid change in the chemical industry and is something that distributors will have to live with. If, like Ellis & Everard, they have strong links at both the corporate and business level they will do well from the changes.
Woods says Ellis & Everard's customers and suppliers are pushing it down the globalisation route. Chemicals is a global business and increasingly chemical producers are seeking their services and expertise both as a supplier and as a channel to distribute their products in all the countries in which they operate. 'Ellis & Everard already has assets on the ground in Europe and the Americas, it should have assets in Asia too.' Already as far as Asia is concerned 'we have put time into it, done studies, developed our knowledge, visited companies and sourced material'.
Visser says Brenntag opened an office in Singapore in August 1997 to investigate market developments and what opportunities are available there. He believes the current crisis in Asia will be beneficial to the group's expansion strategy. Already more Asian players are interested in talking with Brenntag. 'They have recognised they need western help,' he says and this trend is reinforced by the interest western companies operating in Asia have in encouraging the Brenntags, Pakhoeds and Ellis & Everards to become their suppliers and distribution partners in the Asian market.
Existing Asian distributors have a strong position in the local market and it has been difficult to break into that market in the past. Western chemical firms are sometimes critical of existing Asian distributors' standards. 'Although they want us out there', says Visser, 'they do not want to fund it. Whatever we, do the trick will be to do it carefully. Things are changing. Everything is possible now.' Brenntag is already Europe's largest chemical distributor by a considerable margin and set to become even larger. A major acquisition is imminent which, says Visser, will be a tremendous step in the Italian market. There is also the prospect of closer cooperation with one of Europe's other leading players, the Austria-based distributor Neuber. Brenntag's parent company, Veba, acquired a controlling interest in Neuber's parent Degussa in 1997. However, it is not clear at this stage what the relationship between Neuber and Brenntag will be.
As part of the ongoing restructuring in Veba, the Hüls and Degussa chemical interests are being merged and 49% of Stinnes, the trading, logistics and distribution arm of Veba, which includes Brenntag, is being floated on the Frankfurt stock exchange. Could Neuber be incorporated into this transaction? Visser will only admit to 'the possibility that the two firms will grow together'.
As Visser points out: 'Brenntag and Neuber are a great fit', with Neuber's interests in Austria and eastern Europe complementing Brenntag's leadership in Germany, Benelux and France and number two ranking in Spain and Portugal. In eastern Europe, Brenntag opened offices in Russia, Poland and Prague in 1996, including a joint venture with Neuber in Prague, and an office in Vienna, to cover the Danube area in 1997. Visser warned that 'these are all at an early stage and an investment for the future'.
In eastern Europe the business is predominantly specialities. This is unlike the situation in western Europe where the industrial/speciality split is 65:35, while in the US only 15% of the business is specialities.
There is every possibility that the Stinnes stockmarket flotation will be used to raise additional cash to expand the business and fund acquisitions. Over the past five years Brenntag has spent DM500m on acquisitions and Visser believes the flotation will concentrate managers' minds on the need to ensure that shareholders get an adequate return on investments. However, chemical distribution is a core business for Veba and the flotation reflects the group's desire to see the business as a service operation dedicated to its end-users.
Visser admits the company has already done a lot in Europe and the US and its very size restricts expansion. Growth prospects lie in increasing the proportion of specialities in the portfolio - moving towards becoming a full line distributor - and in adding value by relieving suppliers and customers of many tasks they currently manage.
Veba offers customers the prospect of just-in-time delivery by keeping dedicated stocks in warehouses. The group also offers a supermarket shop which means even large chemical producers can benefit from ordering smaller lot chemical requirements through a distributor, leaving the in-house purchasing arm to concentrate on the big picture of sourcing major raw material supplies.
The savings in time and congestion from this one delivery, one invoice offer, has been well received by chemical majors.
The message is that the future is global for the professional distributor, but the business and its supplier and customer base are changing and evolving. Nothing is standing still. To be a winner in the distribution business means seizing opportunities now.
ACQUISITIONS 1997 AND 1998
|Blagden Industries||Marlow (UK)||Speciality chemicals trading||$8.3m|
|BP Chemicals||BH Schilling (Italy)||Chemical distribution||na|
|BP Chemicals||PAR Marketing (UK)||Oleochemical distribution||na|
|Brenntag||Bonnave (Belgium)||Chemical trading, France, Belgium||na|
|Brenntag||Christ Chemie||Chemical distribution France||$16.6m|
|Caldic||Fipprochim||Rhône-Poulenc's silicone and||na|
|elastomers distribution company|
|in the Netherlands and France|
|Ellis & Everard||Chemitrade (UK)||Solvents distribution||$12.1m|
|Ellis & Everard||Mozel (US)||Paints and coatings||$13m|
|Ellis & Everard||Goorden (Belgium)||Food ingredients||na|
|Distrupol||Nordic Polymers||Distribution of engineering plastics|
|(100% Ellis & Everard)||in Scandinavia|
|Distrupol||75% Waldenstrom and||Polymer distribution||na|
|Internatio-Muller||CBG Chemie||Chemical distribution the||na|
|Netherlands and Germany|
|Metallgesellschaft||Klöckner (Germany)||Chemical distributor and trader||na|
|Metallgesellschaft||Chemag (Germany)||Chemical trader|
|Ravago||Resin Express||Engineering polymer distribution||na|
|Belgium and the UK|
|Royal Pakhoed||50% Gazechim Produits||Chemical distribution in the Netherlands||na|
|et Specialites Chimiques||and France|
|Royal Pakhoed||50% Gazechim||Chemical distribution in||na|
|Rhône-Alpes||the Netherlands and France|
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